Hedging Risks and Rewards
Forex trading is a risky business. This chapter will explain the usage of Stop Loss(SL) and Take Profit (TP) orders. These are used for hedging your risks and
rewards, realizing your profits and minimizing your losses.
eToro places an automatic Stop Loss order on all your trades to prevent you from
losing more than you’ve invested. If the rate of your open trade drops below
what’s covered by your investment, the trade is closed by the automatic Stop
Loss. This means the maximum amount you can lose on a trade is almost always
limited to the initial investment of the trade.
Still, there is no reason why you should wait until you lose your entire investment
to close the trade. By setting a Stop Loss order you make sure that the value of
your trade doesn’t drop below a certain level. This way you control the maximum
amount that you are willing to lose on a trade, without having to monitor each
trade around the clock.
Take Profit orders are similar to stop loss orders, only referring to profits. Take
Profit orders make sure that once your trade reaches a certain level of profit it will
be closed.
For instance, imagine that you’ve opened a Long EUR/USD trade for at the rate of
1.5400. After a few hours the rate rises to 1.5500, but an hour later drops to
1.5300. Without a Take Profit order, you might miss the rise in the rate, and end
up with a loss on your hands.
If you had set a Take Profit order, the potential profit of the trade would have
been realized, without you having to monitor the trade around the clock.
Remember, Stop Loss and Take Profit orders are very simple tools that can
make the difference between a successful trading career and a big hole in
your pocket. Consider using these orders with every trade that you make
0 comments: